Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. OCEANEERING INTERNATIONAL INC (73756) 10-Q published on May 01, 2019 at 4:32 pm
Reporting Period: Mar 30, 2019
On January 1, 2019 we adopted Accounting Standards Update ("ASU") 2018-11, an amendment to ASU 2016-02, "Leases" (collectively, the "New Leases Standard") that: (1) requires lessees to recognize a Right-of-Use asset ("ROU assets") and lease liabilities for virtually all leases; and (2) updates previous accounting standards for lessors to align certain requirements of the New Leases Standard and the revenue recognition accounting standard. We have used the transition method allowing us to apply the new standard at the adoption date and have adopted the package of practical expedients permitting us to retain the identification and classification of leases made under the previously applicable accounting standards; we did not adopt the hindsight expedient. The cumulative effect of applying the New Leases Standard as of January 1, 2019 of $5.9 million was recognized as an adjustment to retained earnings, with corresponding adjustments to increase ROU assets and Lease liabilities by $185 million and $191 million, respectively. The standard did not materially affect our net earnings and had no impact on cash flows. The comparative information with respect to prior periods has not been retrospectively restated and continues to be reported under the accounting standards in effect for those periods.
ROU operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, based on the information available at commencement date in determining the present value of future payments. In determining the incremental borrowing rate, we took into account our external credit ratings, bond yields for us and our identified peers, geographic regions where we operate, credit default swap rates and the impact associated with providing collateral for an amount equal to the lease payments. Our ROU operating lease assets also include any lease prepayments made and exclude lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease, which we take into account when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
New Accounting Standards. In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, as modified by subsequently issued ASU 2018-19. The guidance introduces a new credit reserving model know as the Current Expected Credit Loss ("CECL") model, which is based on expected losses, and differs significantly from the incurred loss approach used today. The CECL model requires estimating all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. These ASUs affect an entity to varying degrees depending on the credit quality for the assets held by the entity, their duration and how the entity applies current U.S. GAAP. These ASUs will become effective for us beginning January 1, 2020. We are currently evaluating the impact of this guidance.
For the full year of 2019, at the segment level, we forecast overall ROV fleet utilization in the upper 50% range and ROV EBITDA margin to remain relatively flat. For Subsea Products, we continue to expect: good order intake during the first half of 2019 driving increased activity in the second half of 2019; a book-to-bill ratio in the range of 1.25 to 1.4 for the full year; and operating margins in the mid-single-digit range. We expect good activity levels in Subsea Projects and Advanced Technologies for the remainder of 2019, with operating margins in the low-double-digit range. For Asset Integrity, we expect a slight increase in activity during the second half of 2019 and operating margins in the low-single-digit range. For the remainder of 2019, we expect our quarterly Unallocated Expenses to average $35 million per quarter.
We believe we are the world's largest provider of ROV services, and this business segment historically, but not currently, has been the largest contributor to our Energy Services and Products business operating income. Our ROV segment revenue reflects the utilization percentages, fleet sizes and average pricing of the respective periods. Our ROV operating margins have declined as depreciation has become a higher percentage of revenue, and we have experienced lower utilization and pricing in recent years. Our ROV operating income increased in the three months ended March 31, 2019 compared to the corresponding period of the prior year, mainly due to increased days on hire as utilization improved to 53% from 44%. During the first quarter of 2019, ROV operating results increased compared to the immediately preceding quarter due to increased revenue per day-on-hire largely attributable to reimbursement of costs associated with mobilizations and installations, and our fleet utilization improved to 53% from 52%. We added seven new ROVs to our fleet during the three months ended March 31, 2019 and retired seven, resulting in a total of 275 ROVs in our ROV fleet. We expect our second quarter 2019 ROV operating results to improve from the first quarter results, due to a seasonal increase in days on hire. For the full year 2019, we continue to project increased days on hire in both drill support and vessel-based activity. Although we endeavor to maintain and increase our drill support market share and place more ROVs on vessels, we need a sizable increase in our customers' offshore activity and spending levels for there to be a discernible increase in ROV pricing and profitability.